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Useful articles for your finance management by our team of experts

Get Ready for Higher Rate of Interest on Loans!

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higher loan interest rateBeing a loan borrower has never been easy, especially in Indian conditions. The interest rates have been spiraling to a double digit mark. Higher rate of interest on loans is a major cause of worry. In some cases, it is even inching close to 11%. Thanks to the untamed inflationary situation in the country. The base rates or the minimum rates of lending of the premier banks were revised upwards and soon it was the turn of home loans, car loans, and education loans to appreciate. SBI was the first state run bank that hiked the interest rates, and other private banks joined the party. The two important questions that arise in this case are that, what is the future trend of loan interest rates? And, what are the options available to a borrower or the loan seeker in this scenario?

Interest Rate Trend for Near Future:

The interest rates in the markets are expected to remain static or can be chopped by 0.25-0.50 basis points, but only by the first half of 2014. This sentiment is building due to stability in Indian Rupee that has caught the eyes of stakeholders. The calmness in the selling pressure of INR coupled with buying bouts in financial markets especially Equities has brought some hope for the ailing retail investors. This has happened as the measures of RBI and Government to control inflation started showing positive results.

However, those who are already seeking loans for some or the other purpose, or those who have taken a loan, here are some alternatives that can be embraced:

1.     Loan Transfer:

The best strategy is to look for the options that are available. This especially holds well in case of home loans, which are of high tenure compared to personal loans or automobile loans. Try and analyze the interest rates available in the market. Compare this with the rates of interest you are paying and check whether it will be feasible for you to switch the loan to another lender.

Apart from interest rates, there are things like the disbursement charges, notary charges, and processing fees etc. that should be considered. Most of the banks are now giving the option of a floating rate loan. On the other hand, fixing a higher rate of interest on the loan and especially at an all time high is not a rationale option. Also keep in mind that the revision of the loan on the higher side brings changes in the total tenure of loan.

2.     Switching fee:

Switch fee or conversion fee is slowly becoming popular in the home loan segment. Most of the borrowers who do not want to get into the issue of seeking loans with a different lender opt for lower interest rates (if available) in the same bank. For this, a conversion fee is charged from them. The fees can vary from 0.5-1% on the outstanding borrowing cost.

3.     Prepayment Penalty:

You can opt for an early repayment of the loan, which doesn’t come with a prepayment penalty these days. Infact, this adds into your credit worthiness. Therefore, if you have funds to clear the loan, it is better to go for such an option. In case of part payment, early repayment comes with two alternatives. The person has the option to reduce the EMI or he can reduce the loan tenure.

In case of Automobile loan, repayment options like Step-up Installment or Lump Sum EMI can be taken into account. In Step-Up option, EMI increases progressively over the period of the loan, while in Lump Sum, there is a choice to pay a certain sum at the end of the loan period.

The loan tenure can also be reduced if you ask the bank to increase the EMI as and when the rates of the loans are revised higher. The revision of monthly installments has a considerable impact to plummet the burden of the overall interest and simultaneously decrease the loan maturity.

There is no doubt that higher loan rates can have severe impact on your finances if not taken care of at the right time. At the same time, it is important for the investors to review their investments in various schemes. The interest rates on investment products like Fixed Deposits, Recurring Deposits and Bonds, also increase along with the hike in the loan rates. Therefore, you must be aware of such changes and shift all the investments accordingly to appropriate schemes to fetch a higher return!

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